Standard Contracts – Yes or No?

September 8, 2013

“Beware standard contracts!” That was the exhortation from John Jorgensen in his response to one of my recent blogs. The comment reflects an on-going tension in the ‘should we, shouldn’t we’ debate over standard forms of contract.

In my opinion, standard forms should generally be welcomed. It is the way they are used that tends to be the problem. For example, this note of frustration came to me recently from a member of the IACCM management team: “We have spent hours discussing the terms, then right at the 11th hour someone from Procurement has appeared with a standard agreement that reflects none of our conversation. I would understand if Procurement had been excluded, but the conversations have actually been led by a senior person from that function”.

What this reflects is a use of standards without communication; indeed, you sometimes wonder whether large organizations impose standard forms as a safeguard against ineffective internal process. In this case, they can reflect a mentality of controlling disaster even at the expense of frequently undermining possibility.

Why have standards? Certainly in most organizations the driving issue is control. Standard agreements deliver efficiency; they safeguard against the inevitable gaps in knowledge and business judgment; they reflect established capability, policies and practices; and without them, ‘deviation’ becomes the norm so we do not readily know when we are deviating or what the implications might be.

However, those who oppose standards point to a variety of counter-arguments. For example, standards often cause laziness, a lack of judgment; they undermine the potential that could have been achieved from a well-managed negotiation; when they are used blindly, they obscure risks. And since it is mostly large and powerful organizations that are able to impose standards, they typically reflect an unbalanced allocation of risk and responsibility.

But of course, these disadvantages are not inevitable, any more than the benefits are automatically achieved. To work well, standards must operate within an intelligent management system which ensures they are appropriate to business goals. This means those who set the standards need a continuous monitoring mechanism, internal and external, to grasp when a standard needs to change or when new or alternative forms of standard are required. This may mean adjusting specific terms or providing new term alternates; or it can mean introducing a completely new offering. The real test is whether the system delivers the right standards on a timely basis and also whether it then trains the right people in their use.

Ou rallying cry needs to be ‘Standards that enable, rather than standards that suppress’. Well, I’m not sure we’ll get too many votes for that particular rallying cry, but I am sure you get the point!

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In addition to lack of communication, another problem with standard forms is a lack of efficiency.

For one thing, most big-company template contracts are full of the bloated, archaic, redundant, and generally confusing prose that is the hallmark of traditional contract drafting.

And a static Word template is an unresponsive thing. Using instead document assembly, so that the user creates a contract by completing an annotated online questionnaire, allows you to incorporate a measure of customization.

This is a really good topic on whether standard contract should be the way to go. Well it really depends on what kind of contract we are talking about, but I believe that the BEST contract, is a well drafted, and a fully negotiated agreement in which both parties on both sides of the table participated, and accepted the T&Cs, and potential risks, as the case maybe. A standard contract, or a boiler plate contract has its downside to the Company who provides it, because sometimes, you’re giving away Terms & Conditions which are NOT salient to the project/services…and it is just because it is a standard contract. This is potentially risky as I see it..and could lead to lots of undesirable consequences in the end.

Voltaire, I agree and the more complex the project the more likley it is that Special Conditiions will need to be written to cope with the particular project. Most Standard forms do not anticipate that.and caution against amending the standard form NEC3 its what in that form are called “z conditions” but doesnt reccomend them! CPC2013 actually requires Special Conditions that are written for the specific job and cannot sensibly be used without them.Obviously there is much that can be standardised and that is the place for a standard form , but Secial Conditions are needed for special projects CPC2013 seems to me to be the right approach

There is nothing wrong with standard forms, provided they do the job they are required to do. The problem with those drafted in the 20th Century, is that they do not cater for 21st Century communications, construction techniques or risk management.
With a few bells and whistles added, the formula still adopted by most standard forms of contract available around the world today is based upon the 19th century risk model that the Employer carries the risk, the Contractor has all the tools to manage and control risk, but in the event that the Contractor doesn’t use them to manage the Employer’s risk, the Contractor is to be given more time and more money, intuitively assessed by the contract administrator, on the basis of information provided by the Contractor in support of its claim. The second problem with current standard forms is they do not recognize the different needs of complex projects, which take a long time to design and build from those of simple, virtually sequential projects in which the design is completed before construction starts.
One other consistency, between previous attempts to manage time is that for the last 100 years or so these construction contracts have generally been based upon getting the Contractor to devise a schedule, or programme at the beginning of the job (in the form of a target) against which a failure to achieve the target can be measured, and then reporting against any divergence in the hope that improvement could be made in response to threats and/or financial encouragement. This is at the root of the problems with time management. Historical reporting of failure to achieve a notional fixed target is not an effective way to manage time on complex projects in which, inevitably, the target does not remain fixed.
The CIOB’s Complex Projects Contract is the first standard form contract to recognize and deal with these issues. See http://www.ciob.org/time-managment-cpc-2013

Extensively ‘”NO” to stereotype and stagnant Standard Form Contracts or Boiler Plates but “yes” to Standard Form Contract that are proactive at introducing new terms to meet the dynamics of a trade on both sides, while always ensuring fair terms also on both sides of the divide.

Standard form contract must continuously be made active and proactive both on the sellers side as well as the buyers side to ensure fairness and extensively balanced terms rather than lopsided ones.

Standard form contracts should provide allowance for amendments and new terms to cover both sellers and buyers in new and emerging markets as well as exceptional satiations.

Standard form contracts for complex transactions should be viewed as an internal starting point. A contract manager should review and change, based on proposed commercials and other circumstances before presenting a contract to the other party. Regardless, standard forms should generally be kept up to date and reflect the firms current terms and conditions. A buyer’s standard terms” for software licenses build around a typical on-premise client/server license wont likely apply not to a PaaS agreement, as an example, or a license that follows a different pricing model. Large companies attempt to blindly force (smaller) vendors to “use our paper” often resulting in a protracted, hostile negotiation of a convoluted contract that doesn’t really work well for either party. Only the contracts person may can claim victory at having used their standard form contract, but generally this behavior results in a less than desirable outcome. Today, companies to start looking at how traditional client/vendor relations can evolve into true partnerships and to facilitate that, smart, proactive, respectful contracting becomes a critical step along the way.

Well said, Rima. My take: standard form contracts should be used, but they should be treated as a “live” document, that is regularly reviewed and modified to incorporate progressive learning and experience from previous projects. It’s obvious that standard form contracts are your first line of defence against exposure to liability and risk, but without the flexibility of being able to modify standard form contracts to make them fit-for-purpose, your organization may be putting itself in an equally dangerous situation.